I originally want to post this writing to the article section but was rejected by the editors. So I decided to post it here. Your comments/feedback are welcome.
There are several different blogs speculating Himax Technologies (NASDAQ:HIMX) is the primary vendor for the new and exciting Google Glass. The stock has recently run up from $2.4 at the beginning of the year to hit 52 weeks high of $4.95 (intra-day high) on March 7, 2013 before settling down around $4 level - an astonishing advance of more than 100%! There are some discussion in different message boards asking questions like "is this rising too fast and too high?" or "even with the rumor is true about Google Glass, the business from this project is just several millions at best. Why the stock price reacting so much?". However, if you want to invest or short this small cap stock, the right question people should be asking is "How much is HIMX really worth (intrinsic value)?" Instead of listening to the rumors or relying on speculations, investors and short sellers should be focusing the fact and fundamental of the company and determine your investing strategy.
So let's look at the fact and fundamental of HIMX - In 2012, the company finishing strong and reported revenue of $737 million vs. $633 million in 2011. Non-GAAP earnings at $0.35 vs. $0.10. Furthermore, it provided Q1 guidance of $0.08 Non-GAAP earnings. Along with the guidance, they are implying the Q1 will be the slowest quarter of the year as the prepared remark of the guidance stated that "Looking into 2013, we are seeing strong fundamentals across many of our product lines. The first quarter is likely to be the bottom of the year in terms of sales because it has fewer working days due to Chinese New Year."
Now lets use some basic PE ratio to assign a value range of HIMX. Assuming Q1 come in at the guidance $0.08 and is the lowest of the quarter for 2013, my estimate for the full year of Non-GAAP earnings should be somewhere between $0.32 to $0.40 (current average estimate in yahoo financial is $0.37). So give it a conservative 10x earnings, it should be trading in the range of $3.20 to $4.00. If you assign a more average ratio of 15x earnings, you will have $4.8 to $6 as a price range. This is with the basic FACT and fundamental evaluation with or without Google Glass! Furthermore, when the question raise up during Q4 conference call regarding the guidance of high single-digit to low teens drop from Q4 revenue level, CEO Jordan Wu responded and said it is a very conservation guidance and they want to be sure that they can always meet it. So I have no doubt whether they will meet it or not. The question I am asking is how much will they beat on this guidance when they report their Q1 result in May.
HIMX did a non-deal road show in February and March. The trading volume has increase significantly since that time and the stock price continue its advances. This makes me think some institution investors might be starting to accumulate the shares.
HIMX fundamental business is growing and has a sound financial to support its valuation. If the Google Glass and institution buying is true, the stock will look cheap when you look back several months from now. In conclusion, the stock closing price on 03/19/2013 is $4.04. In using the above PE ratio valuation, you will have a downside risk of 20% (anything below $3.20 is a steal from my opinion) and an upside potential of 50%. This is with or without Google Glass or institutional buying. If both of these speculations come out to be true, the upside potential is much greater. So I conclude the recent run up of the stock is not only justify, but might continue its ascent for awhile. For disclosure, I am long HIMX in both the stock and options. I will continue to accumulate at this level (trading at $4.04 as of 03/19/2013) up to $5 and let the story unfold before I decide what's next. I am planning to update the analysis after HIMX report Q1 in early May. Stay tune!
Disclosure: I am long HIMX.